Gladstone Commercial Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Mortgage Notes Payable and Line of Credit

Mortgage Notes Payable and Line of Credit

6 Months Ended

Jun. 30, 2011

Mortgage Notes Payable and Line of Credit [Abstract]

Mortgage Notes Payable and Line of Credit

5. Mortgage Notes Payable and Line of Credit

The Company’s mortgage notes payable and line of credit as of June 30, 2011 and December 31, 2010 are summarized below:


	Date of
	Issuance/		Principal			Stated Interest Rate at			Principal Balance Outstanding
	Assumption		Maturity Date			June 30, 2011 ⁽¹⁾			June 30, 2011			December 31, 2010
Fixed-Rate Mortgage Notes Payable:
		09/15/08		10/01/11	⁽²⁾		4.58	%	$	45,233		$	48,015
		02/21/06		12/01/13			5.91	%		8,934			9,022
		02/21/06		06/30/14			5.20	%		18,544			18,740
		08/25/05		09/01/15			5.33	%		20,602			20,771
		09/12/05		09/01/15			5.21	%		12,115			12,209
		12/21/05		12/08/15			5.71	%		18,589			18,728
		09/06/07		12/11/15			5.81	%		4,255			4,292
		03/29/06		04/01/16			5.92	%		16,968			17,000
		04/27/06		05/05/16			6.58	%		13,566			13,720
		08/29/08		06/01/16			6.80	%		6,092			6,162
		06/20/11		06/30/16			6.08	%		11,584			—
		11/22/06		12/01/16			5.76	%		13,858			13,954
		12/22/06		01/01/17			5.79	%		21,184			21,330
		02/08/07		03/01/17			6.00	%		13,775			13,775
		06/05/07		06/08/17			6.11	%		14,240			14,240
		10/15/07		11/08/17			6.63	%		15,376			15,474
		12/15/10		12/10/26			6.63	%		10,602			10,795
		03/16/05		04/01/30			6.33	%		2,483			2,642

Contractual Fixed-Rate Mortgage Notes Payable:									$	268,000		$	260,869


Premiums and Discounts, net:										(876	)		(1,274	)


Total Fixed-Rate Mortgage Notes Payable:									$	267,124		$	259,595


Variable-Rate Line of Credit:		12/28/10		12/27/13		LIBOR +3.00%			$	8,200		$	27,000


Total Mortgage Notes Payable and Line of Credit									$	275,324		$	286,595


⁽¹⁾		The weighted average interest rate on all debt outstanding at June 30, 2011 was approximately 5.60%.

⁽²⁾		This note has three annual extension options, which gives the Company the ability to extend the term of the note until October 1, 2013. The first of these options was exercised on September 30, 2010.

Mortgage Notes Payable

As of June 30, 2011, the Company had 18 fixed-rate mortgage notes payable, collateralized by a total of 56 properties. The Company is not a co-borrower, but has limited recourse liabilities that could result from any one or more of the following circumstances: a borrower voluntarily filing for bankruptcy, improper conveyance of a property, fraud or material misrepresentation, misapplication or misappropriation of rents, security deposits, insurance proceeds or condemnation proceeds, or physical waste or damage to the property resulting from a borrower’s gross negligence or willful misconduct. The Company will also indemnify lenders against claims resulting from the presence of hazardous substances or activity involving hazardous substances in violation of environmental laws on a property. The weighted-average interest rate on the mortgage notes payable as of June 30, 2011 was 5.68%.

The Company has $45,233 of balloon principal payments maturing under one of its long-term mortgages on September 30, 2011; however, the mortgage has two remaining annual extension options through 2013, and the Company intends to exercise one of these options in 2011. As long as the Company is in compliance with certain covenants under the mortgage loan, it will be able to exercise the renewal option. As of June 30, 2011 the Company was in compliance with these covenants.

The fair market value of all fixed-rate mortgage notes payable outstanding as of June 30, 2011 was $261,089, as compared to the carrying value stated above of $267,124. The fair market value is calculated based on a discounted cash flow analysis, using interest rates based on management’s estimate of market interest rates on long-term debt with comparable terms.

Scheduled principal payments of mortgage notes payable for the remainder of 2011, each of the five succeeding fiscal years and thereafter are as follows:


	Scheduled principal
Year	payments
Six months ending December 31, 2011	$	47,081	⁽¹⁾
2012		3,956
2013		12,793
2014		21,439
2015		55,282
2016		58,850
Thereafter		68,599

	$	268,000


⁽¹⁾		The $45.2 million mortgage note issued in September 2008 was extended on September 30, 2010 for one year. The Company expects to exercise additional options to extend the maturity date until October 2013.

Line of Credit

In December 2010, the Company procured a $50,000 line of credit (with Capital One, N.A. serving as a revolving lender, a letter of credit issuer and as an administrative agent and Branch Banking and Trust Company serving as a revolving lender and a letter of credit issuer), which matures on December 28, 2013. The line of credit provides for a senior secured revolving credit facility of up to $50,000 with a standby letter of credit sublimit of up to $20,000. The line of credit may, upon satisfaction of certain conditions, be expanded up to $75,000. Currently, nine of the Company’s properties are pledged as collateral under its line of credit. The interest rate per annum applicable to the line of credit is equal to the London Interbank Offered Rate, or LIBOR, plus an applicable margin of up to 3.00%, depending upon the Company’s leverage. The leverage ratio used in determining the applicable margin for interest on the line of credit is recalculated quarterly. The Company is subject to an annual maintenance fee of 0.25% per year. The Company’s ability to access this source of financing is subject to its continued ability to meet customary lending requirements, such as compliance with financial and operating covenants and its meeting certain lending limits. One such covenant requires the Company to limit distributions to its stockholders to 95% of our FFO, with acquisition-related costs required to be expensed under ASC 805 added back to FFO. In addition, the maximum amount the Company may draw under this agreement is based on a percentage of the value of properties pledged as collateral to the banks, which must meet agreed upon eligibility standards.

If and when long-term mortgages are arranged for these pledged properties, the banks will release the properties from the line of credit and reduce the availability under the line of credit by the advanced amount of the released property. Conversely, as the Company purchases new properties meeting the eligibility standards, it may pledge these new properties to obtain additional availability under this agreement. The availability under the line of credit will also be reduced by letters of credit used in the ordinary course of business. The Company may use the advances under the line of credit for both general corporate purposes and the acquisition of new investments.

At June 30, 2011, there was $8,200 outstanding under the line of credit at an interest rate of 3.2% and $5,050 outstanding under letters of credit at a weighted average interest rate of 3.0%. At June 30, 2011, the remaining borrowing capacity available under the line of credit was $32,314. The Company was in compliance with all covenants under the line of credit as of June 30, 2011. The amount outstanding on the line of credit as of June 30, 2011 approximates fair value, because the debt is short-term and variable rate.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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